Canadian interest rates are currently at an all-time low but with the economy in flux it’s more than likely we’ll see an increase in the near future. So if you’re one of the many Canadians who took advantage of borrowing money when the interest rates were low, how will an increase affect you and will it put your financial stability at risk?
We don’t know when or if the interest rates will rise but if they do and you’re currently in one of the following situation you can expect your debt payments to increase:
- If you have a loan (mortgage, line of credit etc.) with a variable interest rate.
- If you are almost at the end of a term for a fixed interest rate loan or mortgage and you need to renew it.
Let’s say you borrowed money under one of the above situations and you’re worried that an increase in your interest rate would make it significantly harder to pay back your debts while still being able to live comfortably. If this is the case you need to risk-proof your budget so that if your interest rate were to rise you’d be able to handle it and your financial stability wouldn’t be at risk.
Visit the Government of Canada’s website for a more in-depth look at how a rise in interest rates will affect you and for a worksheet that will help you to calculate how much you’ll have to pay.
How to Prepare Yourself and Your Finances
Your personal finances don’t manage themselves and they certainly don’t prepare themselves for issues or changes, so if you’re doing to make sure you can handle an increase in your interest rate there are a few things that you need to do:
Consider debt consolidation
If you currently have high interest debt (e.g. credit card debt) you should consider consolidating it with a personal loan that has a much lower interest rate. Just make sure your monthly payments will stay about the same and do not under any circumstance take on any more debt.
The reason this is a good idea is because more of your money will be going towards the actual principal of your loan rather than the interest. This will allow you to reduce your debt quicker.
Focus on high interest debt
If debt consolidation is not something you want or can do, you need to focus on paying off your debts with the highest interest rates first. If you pay off your debts as fast as possible you’ll be paying less interest which will allow you to become debt free faster. Having the least debt possible will make sure you’re not as affect by an increase in interest rates.
Live within or below your means
If an increase in interest rates is something you’re concerned about you should consider not borrowing any more money than in absolutely necessary. And if you need to borrow some money always make sure you’re staying within your means and keep a close eye on how your debts will impact your budget.
If you’re already having trouble making your payments or are stretch to your limits cutting back on spending and household expenses is one of the best ways to prepare yourself for an increase in your interest rates.
Review your budget
To reduce any risk that is associated with an increase in interest rates you should review your budget. This way you’ll be able find ways to save money so that you’ll have extra if you ever need to start paying more interest.
Increase your household income
If you’re struggling with debt and an increase in your interest rate would make it completely unmanageable you should consider increasing your household income. This will allow you to pay back your debt faster and an increase in your interest rate less stressful.
Write it Down and Work it Out
The best thing you can do to prepare yourself for a potential rise in interest rates is to use the worksheet (click here) provided by the Government of Canada to work out how much more you should expect to pay. Use the work sheet to:
- Calculate how much you currently spend in debt repayment
- Figure out how a higher payments will affect your budget, savings account and emergency fund
- Cut back on expenses and rearrange your budget
If you follow all or some of the above steps you should be prepared to handle a rise in Canadian interest rates.